Who’s a Crummey Power Holder?

IRS Attacks Crummey Powers

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In the [in]famous 1991 case of Cristofani v. Commissioner, the Tax Court ruled that the IRS had improperly disallowed gift-tax exclusions to contingent beneficiary grandchildren while allowing exclusions for withdrawal rights given to the donor’s children. The IRS had reasoned that the withdrawal rights of the contingent beneficiary grandchildren did not constitute gifts of present interests in property.

Literature Review

An article by Lawrence Brody and Stephen B. Daiker, “IRS Questioning Legitimacy of Crummey Powerholders” [Journal of Financial Planning, October 1996, pp. 34–35, Institute of Certified Financial Planners (303) 759-4900], presented the IRS’s position with respect to limited withdrawal powers given to trust beneficiaries to qualify transfers to the trust(s) as annual exclusion gifts.

Technical Advice Memorandum

In a July 1996 Technical Advice Memorandum [TAM], the IRS ruled that none of the withdrawal powers granted in that case were gifts of present interests in property and, therefore, did not entitle the donor to gift-tax annual exclusions. These particular irrevocable trusts did not require that actual notice of the withdrawal rights be given to the beneficiaries, and the powerholders had no beneficial trust interest other than the Crummey power.

Also, notices were given to powerholders only days prior to expiration of the withdrawal period, and the trust bank account was not funded until after expiration of the withdrawal period. The IRS also believed that there was a “prearranged understanding” that the Crummey withdrawal right would not be exercised or that doing so would result in unfavorable consequences—including possible disinheritance.

The IRS position

The IRS position seemed to be that if the powerholder has no economic interest in the trust to provide an incentive to allow the withdrawal right to lapse, the annual exclusion will not, in its view, be available. This common-sense approach to Crummey powerholders unfortunately does not clarify whose rights can or cannot be counted.

Assessment

Most likely, there will be additional litigation or rulings in this area, but it appears that medical practitioners, and their advisors, should ascertain that trusts require actual notice to beneficiaries of limited withdrawal rights; that timely notices and trust funding be provided; and that there be no evidence of a “prearranged understanding” regarding withdrawals.

Conclusion

Your thoughts on Crummey powers are appreciated; please opine and comment. Has the situation changed drastically, if at all, since this ruling?

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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